Good day, welcome to the Old Dominion Freight Line second quarter 2022 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Drew Andersen. Please go ahead.
Thank you. Good morning, and welcome to the second quarter 2022 conference call for Old Dominion Freight Line. Today's call is being recorded and will be available for replay beginning today and through August 3rd, 2022 by dialing 1-877-344-7529, access code 7163281. The replay of the webcast may also be accessed for 30 days at the company's website. This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding Old Dominion's expected financial and operating performance. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, the words believes, anticipates, plans, expects, and similar expressions are intended to identify forward-looking statements. You are hereby cautioned that these statements may be affected by the important factors, among others, set forth in Old Dominion's filings with the Securities and Exchange Commission and in this morning's news release, and consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. The company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise. As a final note, before we begin, we welcome your questions today, but we do ask, in fairness to all, that you limit yourself to just a few questions at a time before returning to the queue. Thank you for your cooperation.
At this time, for opening remarks, I would like to turn the conference over to the company's President and Chief Executive Officer, Mr. Greg Gantt. Please go ahead, sir.
Good morning, and welcome to our second quarter conference call. With me on the call today is Adam Satterfield, our CFO. After some brief remarks, we will be glad to take your questions. I am pleased to report that the OD team delivered strong, profitable growth during the second quarter, which resulted in new company records for revenue and profitability. Our revenue increased 26.4% to $1.7 billion, while earnings per diluted share increased 42.9% to $3.30. We also improved our operating ratio by 280 basis points to 69.5%. This is the first time in our company's history that we have produced a sub-70% quarterly operating ratio.
We achieved these results by continuing to execute on our long-term strategic plan, which has guided us for many years and throughout many economic cycles. The disciplined execution of the business fundamentals that form this plan have supported our ability to double our market share over the past 10 years. We are confident that continued execution on this plan positions us to win additional market share over the next 10 years. The foundation for our ability to win market share is our relentless focus on providing superior service at a fair price. Our on-time service performance was 99% in the second quarter, while our cargo claims ratio improved to 0.1%. These service metrics reflect the efforts of our OD family of employees who maintain a steadfast commitment to delivering value to our customers each and every day.
It appears that service quality is becoming even more important to customers when selecting a carrier, which is why demand for our service has remained strong. This is a trend that began to develop with the economic recovery during the second half of 2020, and it continues today as many shippers are still struggling with supply chain issues. As a result, we believe our customer relationships have strengthened as we do our part to help our manufacturing customers keep their facilities running smoothly while helping our retail customers keep products on the shelf and available for sale. Our value proposition also includes having sufficient capacity to support our customers when they need it the most. We currently have approximately 15%-20% excess capacity within our service center network, and we expect to open multiple new facilities during the second half of this year.
These new facilities, as well as various other expansion projects that we expect to complete, should increase the amount of our excess capacity towards our longer-term target of 25%. We remain committed to the ongoing expansion of our service center network, which we believe is important regardless of the short term macroeconomic outlook. Expanding service center capacity can take a significant amount of time, which is why we have historically been proactive with respect to our expansion efforts. This unique strategy has created a capacity advantage for us in the marketplace, which becomes more apparent to shippers in tight environments like we have seen the past couple of years. With over $700 million of year-to-date revenue growth through June, we are on pace to exceed $1 billion of revenue growth for the second year in a row.
We simply could not have achieved these types of numbers without the consistent investment in our service center capacity, as well as the continued investment in our fleet technology and the training and education of our OD family of employees. Our team has shown tremendous flexibility over the past couple of years in response to significant changes in our business levels, and I am confident that this team will continue to build on its success. We have created one of the strongest records for long-term growth and profitability in the LTL industry by executing on our long-term strategic plan. By providing superior service at a fair price and having the capacity to stay ahead of our growth curve, we believe we are better positioned than any other carrier to produce long-term profitable growth while increasing shareholder value.
Thank you for joining us this morning, and now Adam will discuss our second quarter financial results in greater detail.
Thank you, Greg, and good morning. Old Dominion's revenue growth of 26.4% in the second quarter was driven by the 22.6% increase in LTL revenue per hundredweight and 2.8% increase in LTL tons per day. Demand for our superior service remained strong during the quarter, which helped support the steady trend with our volumes and consistent yield improvements. On a sequential basis, revenue per day for the second quarter increased 11.4% when compared to the first quarter of 2022, with LTL tons per day increasing 0.7% and LTL shipments per day increasing 1.7%.
For comparison, the 10-year average sequential change for these metrics includes an increase of 9.6% in revenue per day, an increase of 7.4% in tons per day, and an increase of 7.8% in shipments per day. At this point in July, our revenue per day has increased by approximately 18% when compared to July of 2021, which continues to exceed our long-term average growth rate. As usual, we will provide the actual revenue-related details for July in our second quarter Form 10-Q. Our second quarter operating ratio improved to 69.5%, with improvements in both our direct operating cost and overhead cost as a percent of revenue.
Within our direct operating costs, improvement in salaries, wages and benefits, as well as purchased transportation costs as a percent of revenue, effectively offset the increase in our operating supplies and expenses. The increase in operating supplies and expenses as a percent of revenue was primarily due to the increase in the cost of diesel fuel and other petroleum-based products. We improved our overhead cost as a percent of revenue during the second quarter, primarily by leveraging our quality revenue growth and controlling discretionary spending. As we move into the second half of 2022, we have areas of opportunity to drive further improvement in our financial results. We will continue to focus on obtaining the yield increases necessary to improve the profitability of each customer account. We will also maintain disciplined control over costs to keep our cost inflation on a per shipment basis to a minimum.
Our team is now appropriately sized in most of our service centers to support our anticipated shipment trends, and as a result, we believe we should start seeing improved productivity throughout our operations. The stability of our workforce has also allowed us to reduce our utilization of third-party purchased transportation and move closer to the fully insourced line haul operation that we prefer. We believe this is one of many key factors creating the service advantage we have in our industry, all of which comes back to helping us win long-term market share.
Old Dominion's cash flow from operations totaled $427.3 million and $816.1 million for the second quarter and first half of 2022, respectively, while capital expenditures were $229.4 million and $323.1 million for those same periods. We utilized $293.5 million and $731.9 million of cash for our share repurchase program during the second quarter and first half of 2022, respectively, while cash dividends totaled $33.8 million and $68 million for the same periods. Our effective tax rate was 26.0% for the second quarter of 2022 and 2021.
We currently expect our annual effective tax rate to be 26.0% for the third quarter of 2022. This concludes our prepared remarks this morning. The operator will be happy to open the floor for questions at this time.
We will now begin the question-and-answer session. To ask a question, you may press star and one on a touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question today comes from Jordan Alliger with Goldman Sachs. Please go ahead.
Yeah. Hi, good morning. I was wondering if you could talk a little bit about the price environment. You know, obviously, there are some concerns out there about more than some concerns about moderation in demand and volumes, and some of your rates of growth have probably slowed as well on that front. Can you maybe talk about ex- fuel, sort of the core price thoughts as you move through the balance of this year and, you know, if you had discussions with shippers or have they come to you and, you know, started to talk about things as they approach their next contracts? Thanks.
Yeah. Jordan, so far, we haven't seen, you know, much of any at all of any customers asking for cheaper rates or, you know, any kind of exception pricing or anything such as that.
I think, from what we can tell, the industry is extremely disciplined. I think, you know, over our history, we've been more than extremely disciplined, and I think that'll continue to be our focus. Right now that's what we're seeing throughout the industry. I think that's good for all of us. You know, we'll see. So far very, very positive from that standpoint.
Then just a follow-up on fuel and fuel surcharges. I know the mechanisms are supposed to work as it passes through. Obviously, you know, fuel surcharges have generally ramped up for the industry pretty quickly, maybe even faster than the cost of diesel. Can you talk about the impact on P&L from the rising fuel environment? Thanks.
Yeah.
Jordan, the way our program is designed, we really want it to be neutral to the bottom line as fuel goes up and down. You know, certainly, as contracts come up in each period, and they come up in every quarter for us. As they come up, we look at what the current fuel price environment looks like, and then we try to stress test both up and down to see what that individual customer's overall revenue contributions might look like, and then the same for what their costing looks like.
We try to do the best we can to make sure that you know that customer's individual account profitability, understanding all the costs that go into the model for each individual customer account, will come out positive, whichever way the fuel might trend. I think that our surcharge has certainly been effective with offsetting the increased cost of diesel fuel, and certainly that's having a direct effect on other petroleum-based products. There's also a lot of indirect effect as well. That's why we continue to see our costs going up, and it's why we've got to continue to be disciplined with our yield management program.
Thank you.
The next question comes from Jon Chappell with Evercore ISI. Please go ahead.
Thank you. Good morning. Greg, there's been this thought that, as the trucking capacity, truckload capacity starts to loosen, and especially as we've seen some major retail pre-announcements, that LTL has been this massive beneficiary with the only capacity in town. Can you kind of detail your book of business a little bit and how much you would consider that's on your network today being nontraditional LTL freight? Have you seen any shift in your market share, either up or down, let's call it since mid-May when this whole retail, you know, fear started to really emerge?
Yeah. John, I'm gonna let Adam address that. You know, obviously there's business that moves back and forth, and it's extremely hard to measure, but I think Adam's got a better handle on those specifics, details than I do.
Yeah. John, just to give a little bit of detail. You know, certainly as those announcements came out last quarter from certain retailers, you know, we've been addressing that question. We've got many customers that ship and receive that are beyond those two big box retailers. Nevertheless, you know, our book of business is still 55%-60% industrial.
I think the industrial related customers, and when you look at certain macroeconomic factors in that industrial economy, they're continuing to expand and we probably got a little bit more growth out of our industrial related customers in this most recent quarter than on the retail side. Our retail, which is 25%-30%, continues to perform strongly as well. It's just a little bit below the company average, but we're still seeing nice growth there. You know, it's something that we'll continue to work through, though, and, you know, we believe we've got opportunities with each of those pieces of our business overall. We don't have a lot of truckload spillover type business in our network.
We worked incredibly hard last year to make sure when capacity was at a premium that we were allocating capacity more so to traditional LTL shipments and customers that were tendering those to us for the sense that whenever the truckload environment freed up a little bit, that we wouldn't have this swing of freight going back into that market. Traditionally, you see, more of those shipments would be in our spot quote network. That used to be about 5% of our overall revenue. It's probably about 1.5% at this point. Those are shipments generally that existing customers have and that they're asking for something different from us, so to speak. You know, we feel good about demand. We've talked about that.
We've had a lot of customer engagement in recent months. We're hearing good things from our customers. They continue to demand service quality. We've worked really hard for multiple years on improving and strengthening our value proposition. I think we're seeing that come through with the strength in customer relationships that we have right now. As a result, we're not losing business. You know, the volumes are a little bit flatter, but I think you can just look, and some of that may be demand for existing customers' products. We feel good about everything our customers are telling us and just continuing to work and manage through to where the volumes are currently trending as we try to manage all elements of capacity within our business.
Mm-hmm. That's helpful, Adam. Just for my follow-up to Greg, obviously the economy has changed a little bit since the start of the year. You mentioned you already have or still have 15%-20% spare capacity today, and still have the ambitions to grow the network, as you set out back in January. Have you thought at all about tempering some of that door growth in the back half of this year as the economy becomes a bit more murky? Or is this really your time to shine and invest when others have to scale back, and that kinda just helps with the longer term market share?
Yeah. Yeah, absolutely. It's the latter, Jon, for sure. Sometimes our opportunities are a little better when it slows down and, you know, sometimes you just have better opportunities when it's like it is today. You know, we can't stop. You know, I've talked about it before, how difficult it is to expand your network, how long it takes, how lengthy the process is in certain locations. Some certainly way worse than others. We can't quit. You know, we wanna continue to grow that share, and we know we've got to continue our efforts on a consistent basis to have that tight capacity when things get tight like they have been the last year and a half, two years.
Great. Thanks, Greg. Thanks, Adam.
The next question comes from Jack Atkins with Stephens. Please go ahead.
Okay, great. Good morning, and thank you for taking my questions. I guess maybe to kinda go back to the June and July commentary, could you talk about what June tons per day were on a year-over-year basis? Could you maybe give us that number? You know, Adam, I know we're gonna wait until the cue comes out to get full details on July. Any sort of commentary you can share about how July tonnage is maybe trending versus normal seasonal patterns, I think that'd be helpful for folks.
Sure. On June, our tons per day were flat, basically, with where we were last year. On a sequential basis, it was pretty flat as well. You know, with respect to shipments, let's see, actually, the shipments per day for June were on a year-over-year basis down 0.7%. On a sequential basis, we were up 0.6% versus May. As it relates to July, we are trending up. Our revenue overall was up about 18%. Looking at the yield component of that, you know, we don't like to give the full details.
We used to, if things move 10 basis points off what we had said, that the story could take a different turn, one way or the other. Our yield trends right now, if you look at revenue per hundredweight, in July, it's up about 7.5%, so you can kinda get into what the volume trends will look like. To point out, before anything is written about yield, that's a little bit below where we were for the second quarter. We're gonna see some changes in the mix of our freight as we compare to the third quarter of last year. That was the lowest point for our weight per shipment. We were seeing sequential decreases there.
In the third quarter, the overall average was 1,538 pounds there. We're still trending at about 1,560 or so pounds in July. It was right at 1,570 in the second quarter. As we start to see more of an increase in that weight per shipment, certainly that's usually the lower revenue per hundredweight. That'll have a little bit of an effect there.
Okay. That seven and a half is ex-fuel, correct?
Correct. Yes.
I just wanted to clarify that. I guess for my follow-up, I guess this one's for you as well, Adam. You know, is there a way to maybe think about operating ratio trends sequentially into the third quarter? I think, you know, typically there's a little bit of degradation just seasonally 2Q to 3Q. You know, as we've been talking about for the last two years, it doesn't feel like anything's following normal seasonal patterns anymore though. I would just be curious to get your sense for how we should be thinking about operating ratio trends sequentially. You know, if there's sort of any puts and takes to maybe think about there.
Sure. Yeah. It's normally about a 50 basis point increase from the second to the third quarter. We've got some different things going on that this year. One thing in particular is in our general supplies and expenses. We've got some we don't wanna necessarily say what they are at this point, but we've got some exciting new things that we're doing from a marketing standpoint, where we'll see more cost in the third quarter, the third and the fourth quarters than what we saw in the second quarter. We're expecting about a 40-50 basis point increase in those costs as a percent of revenue from the second to the third quarter just mainly due to the timing of some of these programs.
That would kinda take, you know, normalized up to about 100 basis points. You know, much like we talked about at the end of the first quarter call, our miscellaneous expenses have been trending below what that normal average rate. That's usually about half a point. Might see that revert back to average. That's kinda what I've been anticipating. Somewhere in that, probably 100-150 basis point range, I feel like is kind of just a normalized target for us. That is off a base of a 69.5%, just to make sure everyone saw that.
Absolutely. We definitely saw it. Well, thanks very much for the color, Adam. Really appreciate it. I'll hand it over.
The next question comes from Ravi Shanker with Morgan Stanley. Please go ahead.
I'll just kick off with that comment. Congratulations on the margins, guys. That was a pretty incredible achievement. Maybe to just start off with a big picture question related to that, how do you run the business? Do you run it for top line growth, EBIT growth? Do you have a margin target? Do you have an incremental margin target? Kind of what's your North Star, if you will, in how you run the business?
All of the above.
That's easy.
No, I mean, certainly, you know, we've got just some broad measures that we look at. For one, any dollar that we invest needs to have an appropriate return with it. As we talk with our customers, you know, we look and we think about what our long-term market share opportunities are, and then that dictates the investments that we need to make. Certainly when you look at our strategic plan, it starts with giving good service, and to give good service that supports our yield management, which then produces the cash flow that we can reinvest in capacity and to reinvest back in our employee base, that's really what drives the service product. But we don't wanna just grow for growth's sake.
We feel like we wanna produce profitable growth and that's the reason why we talk about the long-term margin improvement that we feel like we can continue to generate. You know, we laid out an annual operating ratio goal of below 70 when we finished the fourth quarter last year. Certainly doing it for one quarter shows that it can be done, but we've just gotta continue to work at it. You know, there's nothing magic that will make that happen. It'll just be continued disciplined execution of our plan and a focus on a continuous improvement cycle that we have.
It takes every employee coming in every day thinking about what they can do to make this company better, whether it's improving our service and revenue opportunities or trying to take cost out of the equation as well. We wanna continue to produce profitable growth. We've got a good track record of doing it. We think when we look out over the next 10 years, we've got tremendous opportunity there, and that too should create increased shareholder value for us.
Understood. If it were easy, everyone would be doing it. Maybe a second question on the macro. Obviously a lot of red flags out there on inventory levels. What are your customers telling you about what their inventory levels look like? What do you think is potential risk to the cycle in the back half? Maybe if you can distinguish that between industrial and consumer end markets, that'd be helpful.
Yeah. Like what I was saying before, you know, we feel good about what we're hearing from our customers, if you will. It's really things are playing out exactly like we thought they would. For the last couple of quarters, we've talked about the fact that customers were telling us good things that supported the demand trends that we were seeing and what you know we were hearing from customers, and that we felt like that if consumption did slow and it had the effect for slowing overall GDP that freight demand could remain strong. Certainly we feel like that's what we're seeing and what we continue to hear from our customers.
You know, we've had a lot of engagement, like I mentioned, with them, over the last few months. We're still hearing overall that generally inventories are lower than what they need to be. Many of our customers are still dealing with record numbers of back orders that they've got to figure out how to get labor and other, fixing other supply chain issues to make sure they've got all the parts and pieces to produce finished product to fulfill those orders. For that reason, it's something that we think freight demand can continue to remain steady and support a steadiness with volumes as we continue to move through this year.
You know, a lot of people have just got issues they've got to continue to work through. We wanna be there to continue to help them and make sure that if it is one of our manufacturing customers, we're continuing to help them in taking supply chain issues off their plate for them. If it's a product that needs to be available for sale, certainly if you're selecting a carrier with 99% on time and claims ratio of 0.1%, we certainly are gonna provide the service that our customers are demanding.
Got it. I'm just one very last follow-up on fuel. I know you said earlier that you're looking for fuel to be net neutral to EBIT, but I think you're doing a nearly 50% incremental margin on fuel surcharge revenues. I'm just trying to better understand this. Is it just a timing thing? Just from a modeling perspective, how do we think about fuel with the volatility here and kind of maybe moderating in the back half and what that does to your overall incremental margins?
Well, I think that, you know, it's who knows what's gonna happen with the price of fuel, but we're certainly in the camp that we hope it tracks down for the overall health of the economy. I think you've got to look back if we get into a declining fuel rate environment, the impact that might have when you look back in 2015, 2016 was kind of the last period where we saw some pretty big decreases there in the fuel rates. Just like I mentioned before, if we get in that declining rate environment, we'll be looking at contracts as they come due and looking at lower fuel surcharge contributions, but lower fuel costs as well.
You know, I know everyone likes to try to take the fuel out of both the revenue and on the cost side, but the reality is, it's in the revenue that we're trying to collect, and it's in our expenses as we pay our payables. It's something that we've got to account for. It's why when we talk about our long-term yield management philosophy, we include fuel in both the revenue per shipment and the cost per shipment.
If you look over the last 10 or 15 years, with fuel being, you know, moderately higher or moderately lower when you look on an average basis over that period, we've been able to exceed our cost per shipment inflation between 100 and 150 basis points. So in some individual quarters, that may look a little different than others, but, you know, we've got a lot of long-term customers, and that's how you've got to look at things from a customer relationship standpoint is overall, what are those inputs on the revenue and cost side and how can we continue to create some positive delta there to help us continue to reinvest in the capacity back in our business?
Because no one else is investing in service center capacity like we are. That's part of the value proposition so we can help our customers grow.
Great. Thank you so much.
The next question comes from Tom Wadewitz with UBS. Please go ahead.
Good morning, it's Tom Wadewitz. I think, Adam, you talked about headcount, and you said you kinda have the resource you need and can probably be steady for a while. I think, you know, when you've added a lot of people in a short period of time, there's opportunity for them to kinda learn the system and get better at what they do. How should we think about the potential impact to your margin or to different cost buckets if we have kind of a stable tonnage backdrop and a stable headcount framework for you the next couple quarters? How might that productivity affect margin, you know, and which cost lines might improve?
Yeah, Todd, I'm gonna try to answer that for you. I'll say this, you know, we've been through a tough time, not just OD, but the entire LTL industry with the growth that we've experienced in the last year and a half, two years, since the fall of 2020. It's been a handful for all of us to respond to our customer needs and people requirements, equipment and all those kind of things. You know, we've hired an awful lot of people, somewhere in the 6,000+ range, when you look at all across all employees, dock, drivers and everything else. It's an awful lot of additional headcount. You know, in that comes an awful lot of inexperienced folks that we've had to deal with over the last couple years.
While you know, I don't think anybody would say they really want things to slow down, and certainly I don't. I mean, it's fun when you're busy and you've got challenges trying to accomplish all the things you want to accomplish. At the same time, you know, when we get into these leaner times and we start to flatten out like we are now, it's not all bad. You know, you can step back and start to refine some of your processes. You end up with certainly better trained employees and whatnot. They understand what to do, how to do it. You're not adding to the list of folks like you were back, you know, in the last couple years. It's not bad by any stretch.
Certainly our platform productivity, our P&D productivity, you know, maybe some of the aspects of line haul load factor and whatnot, those are included as well. We can improve in all of those areas. It also gives you some time to look at your clerical processes and whatnot. You know, what's good, what's bad? You know, is there some technology out there that can help you with those kind of things? There's just an awful lot of advantages to not being so crazy busy like we've been. You know, definitely positive from that standpoint.
Again, nobody wants to see it slow down, but certainly, you know, we look at the positive aspect of it and, you know, what we can accomplish, you know, while it's this way and, you know, be better when we come out of it on the other side, certainly.
Okay. I guess the second question is really just kind of a clarification, or I know you talked a bit about July. I had a couple of questions on that. Is the tonnage implied in that something around flat, or does it imply down a little bit? I know you don't wanna give us the precise numbers 'cause they can change a bit as you have the full month. But is the backing into kind of a flattish tonnage number about right, what you've seen so far in July?
It is. It's down slightly, Tom. Down slightly on a year-over-year basis. You know, similar to what we've seen in the prior couple of quarters, the first month of the quarter, in the first quarter this year, the second quarter as well, was well below normal seasonal trends. I would say that we're a little bit below our normal seasonality. Typically, July is always a month that decreases. It typically decreases about 3% as compared to June.
We are a little bit below that, but you know, as some of you are looking too at from a year-over-year standpoint, comparing this year back to 2019, at least what we're seeing is kind of somewhat similar trend in July versus June, looking at it from that perspective as well. We'll see how the rest of the third quarter continues to play out. You know, typically September is our busiest month of the year. We'll look to see if volumes, if we get some sequential acceleration to get through the remainder of this quarter.
It's just something we'll continue to stay engaged with our customers on and try to continue to manage from a cost standpoint and make sure we've got you know everyone and everything in place to deal with the volumes that we're seeing.
Right. Okay. Great. Thanks, Adam. Thanks, Greg.
The next question comes from Chris Wetherbee with Citigroup. Please go ahead.
Hey, thanks. Yeah, good morning. You know, I guess I just wanted to touch on sort of the commentary around the pace of demand and not to be too nitpicky, but I guess I just wanna sort of maybe understand. It seems like tonnage is maybe performing a little bit less than typical seasonality. So I guess I'm curious, do you think there is, you know, a sort of demand deceleration that's kind of becoming more clear within the numbers? It sounds like customers are still relatively optimistic about what the pace of volume might look like as the year progresses. Is there a bit of a disconnect between what you're hearing from them and what's actually coming through from a tonnage perspective?
You know, I don't know that it's. I mean, this is really something we've had to address all year and really trying to bifurcate the demand that we're seeing and hearing from our customers versus the actual tonnage trends. You know, we have, like I just mentioned, we have underperformed normal seasonality, but we have to somewhat keep in mind too that our 10-year average trends, that includes our market share doubling over that time period. You know, we have continued to win market share.
I think, when you look at our numbers, versus the industry, the last two or three quarters, I think, if you take the public carriers, the tons have been negative, overall for that group while you've seen obviously tremendous growth, from us. I still think that, based on the feedback and conversations with customers, that you'll continue to see, our volume numbers outperforming, at least that public group that we compare against. You know, the conversation around demand, is the demand for our service. You know, certainly our customers, they may not have the same type of volumes, so we're still picking up. We haven't lost any customer accounts. We're still making pickups every day.
It may just be they don't have the same number of shipments to give us because some of the demand for their product has decreased. You know, I think the positive takeaway from this is how strong we continue to see the strength of our pricing programs, but just those customer conversations and no customer defections, and the conversation about the need for service and how important that is becoming to our customers.
We've certainly proven our value proposition over years and how we may be a little bit more expensive up front, but when you look at the total cost of transportation, whether it's delivering and meeting the on time and full requirements that some of the retailers have in place, we can ultimately help our customers save money. Those are the things that continue to drive these positive customer conversations that we're having.
Okay. No, that's very helpful. I appreciate that color. That makes sense. You know, and you guys have been through obviously many cycles and so, and have been pretty successful navigating through those cycles. You just mentioned the sort of resiliency and the pricing that you're able to get in this market, even as maybe demand at your customers is beginning to fall a little bit. If we think about, like, sort of a normal recession, whatever that may be in your definition, you know, how do you think sort of operating ratio and maybe earnings power progresses, assuming that maybe the back half or some point in 2023, we're seeing more sustained negative volumes for the industry? You know, is positive profit something that we can kinda continue to look for from the model?
Just kinda curious how you think about that resiliency and downturn.
Chris, I think you know, all of us are gonna have to see where this thing goes. I mean, I don't think we're in a recession yet. At least I haven't heard that. We'll have to see where it goes. At the same time, you gotta remember, you know, we're up against some tremendous numbers that from last year, and we're still at a very decent level of business where we can turn a pretty good profit, I think. I mean, I think we've proven that, right? Certainly the second quarter bears that out. I think we're still in a pretty good spot. Again, you know, we can't control the economy and some of the things that the government does and that drives some of it and whatnot.
I think we're still in a good spot today and, you know, let's hope we don't see further deterioration and, you know, the things going on from an economic standpoint, so.
Okay. No, that's very helpful. Certainly we can see the strength of the numbers. There's no doubt about that. Thanks for the time. I appreciate it.
Sure.
The next question comes from Scott Group with Wolfe Research. Please go ahead.
Hey, thanks. Morning. I just wanted to follow up on the headcount question. If I look back at some of the past periods where tonnage has gone negative, headcount usually follows and comes down too. If I just take, you know, flat headcount from here in Q3, it's still up about 10%. Do you see opportunities if tonnage stays negative to reduce headcount? Or are you gonna be potentially more reluctant to do that this time around, just, you know, given, you know, the problems that everybody had hiring people?
I think maybe you're pretty perceptive of how our industry has been the last couple years with that question, Scott. No question, I mean, we certainly don't want to get in a situation where we have to start making cuts and that kind of thing. That's extremely hard to do. We always hate to do that. I mean, obviously, we've got to try to match revenue or the shipment levels to labor. I mean, you know, that's what we've done for many, many years, and we'll have to continue to do that. You know, in some cases, attrition helps to take care of our situation. You know, we always have a little bit of that, probably much less here than most places. You know, we obviously sit on hiring.
We're not actively hiring hardly anywhere now. Maybe specific needs and replacements and that kind of thing, but we're certainly not adding anybody over on top of what we've got. Yes, I can promise you any reductions we would make, we would look at those very, very carefully before we execute it, if that makes sense.
Okay. It does sound like if we're not sort of hiring more, well, there will be some sort of natural attrition that could, you know, take the headcount down a little bit from here.
Certainly. Absolutely.
Okay. Maybe just to tie that with that last question. In an environment where tonnage stays negative for a little bit, do you think you could still improve the operating ratio or maintain the operating ratio as you've done in, you know, what, 15 out of 16 years or something like that?
Well, that would obviously be our objective to continue to maintain and certainly improve. I think we've proven it over the course of time. You know, we'll just have to wait and see. I don't, you know, I don't want to get into all of that at this point in time. You know, my crystal ball is not completely crystal clear, so, you know, we'll just have to see where it goes. You know, we'll certainly continue to do the right things day to day. We'll continue to execute from a service standpoint and whatnot, keep our people focused on doing the right things. You know, those are the things that drive the bottom line, sometimes the top and the bottom line. We'll continue to do those things well, and, you know, we'll see where it goes.
Thank you for the time, guys. Appreciate it.
Sure.
The next question comes from Todd Fowler with KeyBank Capital Markets. Please go ahead.
Hey. Great. Thanks, and good morning. Adam, in your prepared comments, you had some commentary about cost inflation into the back half of the year. I'm guessing, or I think that traditionally you put through an employee wage increase at some point in the third quarter. It sounds like you're also getting some benefit from improving productivity from the workforce standpoint. I guess my question is, are your comments that cost inflation on a per shipment basis going to increase or accelerate in the back half of the year, or does that start to level off? I'm just kind of curious what your expectations are on the cost inflation side moving forward.
Yeah. We do always give a wage increase at the beginning of September each year. That's pretty standard in terms of it's in our numbers, and it's part of the reason why the third quarter operating ratio is generally higher than the second. You know, from an overall inflation standpoint, when we started the year, we expected higher inflation in the first half. Really, we started seeing costs increasing about this point in time last year. Our costs were going up, and that's when you can really start seeing when we looked at contracts that were turning over in those periods, we had to get larger increases then.
We felt like we were gonna see some moderation with our cost in the back half of this year, but certainly didn't foresee the sustained increase in fuel prices and them continue to accelerate like they have this year. That's having a follow-on effect both directly and indirectly with other pieces of our cost structure. You know, at this point I don't expect to see that moderation like we had initially talked about, but don't necessarily see it accelerating either from this point. I just think that you know, we're gonna continue to see maybe that core inflation number kind of in that 7%-9% range like we have.
You know, when you take a look at our cost and back out the operating supplies and expenses, which includes fuel, they were up about 10% in the second quarter on a per shipment basis. You know, it's certainly higher than where we thought it would be. You know, but we do have some opportunities, like Greg mentioned. You know, we certainly wanna continue to focus on improving the productivity of all areas of our operation. I think that can help some of that cost per shipment inflation. We were able to reduce our purchased transportation in the second quarter. There's still a little bit of miles that we were outsourcing in the second quarter.
You know, we're back in that 2%-2.5% range, number with that line item. You know, there may be a little bit more out of that number where we can see some decreases. Otherwise, it's just trying to manage each and every line item on the income statement that we can and look for areas with discretionary spending that we can pull back on and just look, you know, for any area that we can ultimately save some dollars.
Perfect. Okay, good. That's helpful, and that makes a lot of sense. I guess just to follow up and, you know, it's a little bit of a tricky question to ask, but from a bigger picture standpoint, it sounds like a lot of your competitors, you know, their approach to the LTL market now is a lot more like your approach, you know, adding some more terminals, focusing more on service. I guess as you think about the competitive landscape, does that change, you know, your ability to win share in the marketplace going forward? Or have you seen any differences in customer responses due to, you know, some of the things that your competitors have been doing over the last, you know, let's call it, you know, four to six quarters?
I don't think so, Todd. I mean, we'll continue to execute and do the things that we know best how to do. I think we've had a pretty steady run up on our share, and I would expect that to continue.
Yeah, it makes sense. I know it's a tricky question to ask, but just was curious your thoughts on it. Thanks for the time this morning. I'll turn it over.
The next question comes from Ken Hoexter with Bank of America. Please go ahead.
Great. Good morning. Greg and Adam, congrats on breaking 70. A tremendous group leadership there. Just a few. I guess you had a few questions on the downturn or potential impacts on the operating ratio. Maybe just if July is starting to see larger negative tonnage trends versus June and maybe a little bit more than seasonality, can you talk about a normal cycle? How does that bleed into pricing pressure? I know you don't typically change your pricing given the quality of service, but for the group, how long does it take to see those negative trends kick in and start showing up on the pricing side, especially given what's happened with the truckload side?
Yeah, again, I think that when you look at the rest of the group excluding us, I think overall, there's been at least the past three quarters or so where volumes have been negative or at least flat, going back to last year. The pricing environment, that is, has continued to remain positive. You know, we haven't heard anything any different really in that regard. You know, I think that we know what our strategies are and what we're gonna continue to do. You know, a big piece of our yield management strategy is making sure that we're trying to cover the cost inflation we see in our business.
An even bigger element is making sure that we're generating the returns that will help us continue to invest dollars in the real estate network. You know, I think when you look over the last 10 years, we've invested about $2 billion in expanding the capacity of our network. When you look at the expansion of our door capacity is about a little over 50% over that 10-year timeframe, and at least the number of service centers in the industry is actually down a few percent. Regardless if you see some additions here and there, we have been adding really at our customer's request, and our customers are leveraging our network, especially in the retail side.
Some of this e-commerce freight comes and transitions from the truckload world into LTL. That's the power of our network. It helps our customers with managing their supply chains and ultimately, we think, helping them save money overall. That's why we've got to continue to work at it. You know, it's still an environment where we've got positive revenue growth. You know, our revenue growth of 18%, you know, includes that slight decrease in July for tons that we're seeing. We're still producing revenue growth that's above our long-term average revenue growth rate when you look over the last 10 years.
You know, we're just gonna continue to look at leveraging that to the bottom line. Certainly, you know, kind of what we talked about with the operating ratio moving into the third quarter, that would still produce some pretty good improvement there on the next quarter's OR.
Adam, just to clarify that, you know, you talked about the last couple of quarters seeing the industry. In the past, have you seen a more immediate impact to industry pricing or even your pricing in a down tonnage environment? Does it take about three quarters or whatever to start seeing some pressure on price? I'm just trying to see if this time really is different because of the industry moves or if this is more historically normal on a delayed pricing impact.
Well, I think, you know, if you look back in 2019 is a good example where the environment was softer. I think the industry was pretty disciplined with pricing during that period. You know, we certainly expect that our own pricing will continue to be positive. Again, we haven't really heard anything from any other carriers. We'll continue to see maybe what they're saying publicly as well. You know, I think it takes a lot to run in an LTL company. Certainly there's a network effect that has to be managed there, and that's the big difference between us and the truckload environment.
I think that it seems to us from what we've heard that there's not many LTL carriers, at least the public ones, that have taken on a lot of truckload spill over freight. I don't think you're gonna see this vacuum effect as truckload has loosened a little bit of freight spilling back into that mode like we may have seen in prior cycles as well either. To me, that would lend itself to seeing a little bit more stability maybe with volumes, even though, you know, like I mentioned, they're down for the other carriers or have been for the last few quarters. We'll continue to watch that.
You know, I think we would expect to see the continuation of a disciplined approach, much like we did in 2019.
Can I just get a clarification on one of the prior questions? You talked about stalling hiring now. If we see, I guess, those volumes staying at these levels, is that something you then expect the attrition to overtake your hiring, and so you expect that to come in? I just wanted to clarify kinda your comments on the employee levels.
Well, you know, the hiring practices, that's something that each one of our 255 service center managers are responsible for. They have to stay engaged with their customers at the local level, to know what freight demand within their facility is gonna look like, to then make sure that they've got the right people capacity in place to be able to respond and give the service that our customers demand from us. You know, that's something that we let them manage. It's not just the number of people they have in place. There's always managing the hours worked up and down based on changes with the volumes as well. You know, we just got to continue to watch overall how the volumes trend.
You know, we feel good about our numbers right now, and we feel good about our overall level of headcount as well. Ultimately, you know, we'll continue to let our service centers manage that. Individually, you may be seeing some that are making additions because they're growing. We're seeing in some facilities really strong double-digit outbound type of revenue and volume growth. Then, the others, if they've got some weakness in their facility for whatever reason, specific customer type of issue, then they've got to manage on the other side. It's a coordinated effort that's really we give that responsibility with oversight, obviously. Our service center managers are handling that on a day-to-day basis.
Wonderful. Thank you very much, Adam. Greg, appreciate the time.
The next question comes from Amit Mehrotra with Deutsche Bank. Please go ahead.
Hey, thanks. I'll try to just ask one question to balance out the three questions that some other people asked. Well, I think three or four years ago, Greg and Adam, you kinda started the call mentioning you know, some deteriorating pricing power in the industry. On follow-up, you kinda talked about you know, just bringing attention to some indiscipline that you're seeing in certain lanes. I think part of the motivation was to kinda nip it in the bud early. It seems like we're kind of at that part in the cycle where we could start to see that a little bit. I'd love for you guys to comment on that.
Are you seeing any large national players because of weaker service levels or whatever that may be seeing a little bit more deterioration in demand start to be a little bit more indisciplined on pricing, if you can comment on that?
No. We have not seen that at all. Certainly not to my knowledge. I haven't heard that. Like Adam had mentioned earlier, we've had an awful lot of customer interaction so far this year with customers, you know, coming here. Some of the things we're doing out in the field from a customer standpoint, we have not seen that, have not gotten that type of feedback from our sales department. So I think that's all positive. You know, I think if you look at our LTL industry, you know, we're all healthier than we've been for the most part. I think the bottom lines have improved across the board. I think I can say that without putting a whole lot of thought into it. You know, I think everybody has to see the benefit of being price disciplined, surely.
I think it's benefited the industry in general. Yeah, let's hope that continues.
Okay. That's my one. Thank you very much. Appreciate it.
The next question comes from Bruce Chan with Stifel. Please go ahead.
Great. Thanks for the time here. Greg, just wanna follow up on those pricing comments really quick. We've heard from a few others out there that there's been a little bit of a pickup in inbound RFP and RFQ, maybe especially from the larger national account side. Are you all seeing any signs of that?
I don't think so. I haven't heard that. I mean, you know, most of our bigger national accounts, they're all. You know, we have annual renewals and whatnot. Some may be on two or three-year type renewals, but most everybody's on an annual renewal. I haven't heard that there's any huge pickup with that at all. No, at this point, not. You know, we'll see. We'll certainly have to wait and see. So far, so good from our standpoint.
Okay, great. Appreciate the time.
The next question comes from Ariel Rosa with Credit Suisse. Please go ahead.
Hey, good morning, Greg, Adam. Thanks for squeezing me in here. You guys talked about investing in the network to take share through the cycle or preparing for the next cycle. It's certainly a formula that's worked very well for OD in the past. I wanted to get your sense for kind of how you're thinking about that in terms of the longevity of what a down cycle might look like and kind of the risk that you might be sitting on idle capacity for an extended period of time, if demand deteriorates. It seems like there's two different schools of thought.
On one level, you know, it seems like the LTL industry has been pretty tight on capacity and pretty disciplined about the way it's invested, and maybe that means there hasn't been as much froth that's developed on the supply side. At the same time, obviously, what we've seen in terms of consumer spending and durable goods orders has been pretty anomalous over the last kind of 18-24 months, given COVID. Maybe there's some concern that those conditions that have existed over the past 18 months or so aren't really sustainable from a demand perspective.
I just wanted to kinda hear your thoughts on as you invest to expand the service center footprint, how do you perceive the risk that you might be sitting on idle capacity for maybe a longer period of time than you might hope for?
Yeah. I think we're always sitting on idle capacity and, you know, that's really what we want to have in place. You know, we generally target having 20%-25% excess capacity at all times. The reason for that is, as quickly as demand can change, you can't put service center capacity in place quick enough. It takes doors in an LTL network to really process freight and be able to grow. Certainly, you gotta have equipment and people as well, but the doors are really what takes the most time to get in place.
It's why when we see these positive inflections in the domestic economy, that you see the rate of market share growth for us increase significantly, where we're outperforming the rest of the group by, you know, double digits, if you will. You gotta put it in place, you gotta have a consistent investment process and just continuing to work at it, knowing where things are tighter and where you might be tight in a couple of years' time, if volume comes back to you in a big way. You know, we're used to carrying that extra cost, but that's part of our strategy, and it is different. We like to keep that excess capacity in place.
Most of the industry, it seems, operates closer to full utilization within the network, and that creates a lot of volume opportunities like we saw in 2020 in the back half as the recovery began, and certainly through 2021 with the rate of growth that we had then and so far through the first half of this year. Again, as we said earlier, we've produced over $700 million of revenue growth. You know, last year was a record at $1.2 billion for us, and we're on a good pace to have another $1 billion+ type of revenue growth year. It certainly takes making those investments.
You know, when you look and trying to go back into some of these prior years when there has been a down cycle, you can look at our operating ratio in 2016 and 2019. We're able to manage all of our variable costs, well and try to take advantage of productivity opportunities. Generally, the only change in the operating ratio you might see is with respect to that depreciation line item, and that's where we are making those investments. Those depreciation costs will increase as a percent of revenue, but we try to manage all of the other costs flat or with some improvement, if we can, to minimize any type of negative impact on the operating ratio until we get that volume flow coming through again.
You know, we've said it takes density and yield to produce long-term margin improvement and that will continue into the future as well. You certainly, to get that density factor, it takes a continuous investment in capacity.
Got it. Understood. Okay, thank you for the time.
The next question comes from Bascome Majors with Susquehanna. Please go ahead.
Adam, in the last six months, you guys have bought considerably more stock than you bought in any prior full year. Can you talk a little bit about the pace you feel comfortable with in the second half and-
Will you consider adding a little leverage to take advantage of the share price? Or historically, you've been, you know, within your free cash flow as far as total shareholder returns, is that a good kind of bookend to think about as we think about where share repurchase could go? Thanks.
Well, certainly the repurchase program, you know, we typically look at our cash from operations and at the beginning of every year, we know what our CapEx is gonna be, and then we've got the fixed return element through the dividend program. Then we typically take the balance and try to put that into the share repurchase program. You know, we have said in prior periods when we think the opportunity is right, we'll put more dollars into that program, and certainly that's how we have felt this year. In the first quarter, we did have a $400 million accelerated share repurchase program.
In the second quarter, it was more strategic and just day-to-day buying on a more of a 10b5-1 type of basis. You know, we'll continue to look at all options as we move forward. Certainly, when the share price is at the level where it's been, you know, it's certainly down from where we finished last year and we're gonna continue to buy more shares and use the cash that's on the balance sheet, you know, for starters. You know, you just gotta continue to look at it on a day-to-day basis.
In the past, we've said we don't necessarily want to directly borrow to go out to buy stock, but we've always just got to look at kind of where the price is trending and what we think the best use of cash is, and then just trying to take a longer term view of it as well.
It sounds like leverage to buy stock is not plan A, but opportunism can make that possible depending on your view of the market versus your stock price.
Correct.
Thank you.
The next question comes from James Monigan with Wells Fargo. Please go ahead.
Hey, guys. Thank you. Just wanted to actually touch on or follow up on something you'd mentioned around the spread between pricing and cost and just the pricing environment overall. Just wanted to sort of get your sense on sort of the amount of sort of cost pressure maybe some of your competitors are under and if you think that might keep discipline fairly high around pricing. Also just maybe sort of thinking about like the outlook for that spread moving forward, just given the fact that you guys own more of your assets and therefore might have a cost advantage.
Yeah, I don't know that we can comment on our competitors' cost structures, but you know, certainly for us, you know, we obviously feel like we've got opportunity to continue to try to reduce some of our costs through productivity. But that's again, kind of going back to our continuous improvement cycle, and then trying to price above cost. You know, it's not always on a quarter-by-quarter basis, again, it's not always gonna be that we've got that 100-150 basis points delta in our revenue per shipment and cost per shipment performance. You got to look at that on a more of a core basis.
We just look at it over a longer term time horizon. You know, that's one of the yield improvements, you know, one big element for the long-term margin improvement opportunities that we think we have. You know, obviously a lot goes into that. It's easy to sit here and say that, you know, we need yield above cost, but a lot go into both of those metrics. Certainly you gotta have the service to support the yield. Then we've got to continue to look at ways that we can save on the cost side as well, to make sure that our pricing is still in alignment with the market.
We do believe we can get a price premium in the market, based on the quality of our service. You know, we study our Mastio quality results closely each year to look at how we compare against ourselves and how we compare against the rest of the industry to make sure that we're staying on top of changes, we're staying ahead of the market. We're continuing to give our customers what they're asking for as well, be it through capacity and markets, be it capacity of our trailer pool, technologies, pricing programs, and new changes there. You name it, we're always trying to stay ahead of the curve.
We feel confident that we've got a lot of market share opportunities in front of us. We just wanna keep our focus on execution to make sure we take advantage of those opportunities. Make sure that it's not just growth, it's good profitable growth.
Got it. Actually, just given how much costs have run up, do you think that, there's a repricing opportunity or a need to reprice moving forward on a larger portion of your business than normal?
No. Again, that's part of our continuous improvement cycle. You know, our contracts in our business come up every day. It's why you generally see, you know, on a sequential basis, improvements in our yield metrics, as we go from quarter to quarter. As a contract comes up for renewal, we're gonna ask for an increase. You know, to improve the yield on an account, it's not always through a price increase either. It's looking at other areas of opportunity, and ways that we can help a customer save money. That may be an operational change. You know, it could be a number of things.
That's why it's so important for our sales team to stay engaged with our customers to understand what their needs are, our pricing team as well, so that we can work together and create win-win situations. 'Cause, you know, we're not here to just have a customer for this quarter and the next quarter. We've got customers that have been in place for many years, and any new customer that's coming on board, we want them to be in place for the long term as well. It's all about creating those win-win situations.
Whether it's, you know, again, through an operational change, you know, we've recently announced a new pricing program as well that we've got some engagement on and some excitement that can eliminate the need to have payment audit services for customers. You know, those are the ways that we're gonna continue to stay engaged with our customer base and try to do right things right by them and keep improving ourselves, both the top and the bottom ones.
Thank you.
This concludes our question-and-answer session. I would like to turn the conference back over to Greg Gantt for any closing remarks.
Well, thank you all for your participation today. We appreciate your questions, and please feel free to give us a call if you have anything further. Thanks, and I hope you have a great day.